As the U.S. adopts the EMV smart-card standard, banks must address their own needs, such as replacing the transaction switch of their payment routing systems, according to Acquirer Systems of Dublin, Ireland.
The transaction switch moves payments from their origins to payment networks, third parties or back-office sectors of the bank. Many banks installed their switch as much as 10 to 30 years ago, says Acquirer Systems CEO Fergal Molloy.
"The switch migration is taking place against a backdrop of immense change in the payments industry today, making it a universal problem," Molloy says. Acquirer Systems provides testing and validation of bank payment routing systems, and support for switch migration projects.
Consumers are increasingly tech-savvy, creating more transactions through mobile banking and online bill payment, Molloy says. Payment technologies such as Near Field Communication, EMV smart cards, contactless and app-based transactions add to the strain on a dated transaction switch, he adds.
"A complete switch migration would include an overhaul of hardware and software and is typically a once-in-a-decade type of activity," Molloy says.
However, the fast pace of change in payments technology will make it critical for banks to make sound decisions early in the process of a full migration, which can take up to three years to complete, Molloy adds.
Stephen Kenneally, vice president of the American Bankers Association's Center for Regulatory Compliance, says the largest challenge for banks may be the financial commitment of switch migration, rather than technical hurdles.
"Banks need to meet the volume demand and provide a return on investment," Kenneally says.
A switch migration project could cost a medium-size or large bank $25 million to $50 million or more, Molloy says. A small community bank could complete a switch migration for between $1 million and $5 million, he adds.
"Up to 60% of the overall costs of a migration project will be absorbed by non-capital expense costs, and that is where the project will succeed or fail" as banks put together strategies, Molloy says.
Banks and payment processors consistently upgrade their systems to meet demand, and they do so in a way that will not create an interruption to services, Kenneally says.
"If a bank chooses a more conservative migration plan, it may absorb added liability for fraudulent transactions, but that will be transparent to the consumer who will continue to use the card seamlessly," Kenneally adds.
Innovations in payments, such as mobile, real-time, social commerce and others are clearly putting pressure on banks' payment technologies in general, and payment switches in particular, says Zil Bareisis, a London-based senior analyst for research firm Celent.
"Banks have a decision to make whether to upgrade those technologies and if so, how?" Bareisis says. "For example, it could be through a modern switch or a payment hub, or they could outsource it to a processor."
Kenneally says new, or changing, federal regulations often equate to technology and payment systems challenges for banks. As for the emerging payment technologies, Kenneally says banks have to support the "winning technology or risk losing a significant investment if they back the wrong horse."
A Look at the Technology
A payment transaction switch environment is a mix of hardware and software in the same vein as a card issuing system, a merchant acquiring platform, or a bank's core back office, Molloy says.
Companies such as IBM, Hewlett-Packard, Stratus and others provide the hardware.
ACI Worldwide, Lusis, Openway and others provide the software that performs the payment transaction switching function, Molloy says.
The hardware security module provides specific security services to the payment transaction switch, such as encryption and decryption tasks. The modules also validate cryptographic signatures, such as those used in EMV transactions.
An Acquirers Systems report indicates many switch vendors plan to retire their legacy platforms, citing ACI Worldwide as doing so with Base24, a dominant payments switching platform for more than two decades. ACI Worldwide did not respond to inquiries for this story.
Gareth Lodge, a London-based industry analyst with Celent, confirms that ACI made the Base24 announcement five years ago, though many banks still use the system.
"This won't last forever, but equally I'm not aware of a time that has been set by ACI when they'll abandon Base24 either," Lodge says.
It doesn't take away from the fact that many banks use technology that is "ancient," Lodge says. However, much of that technology is "heritage more than legacy," meaning it is still very good at what it was designed to do, Lodge adds.
"It's really a question of what they're now being asked to do in addition to [their original design]," Lodge says. "For some, that means investing in new technology."